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October 18, 2012  Thu 12:19 PM CT

LOW: SEE CHART GET CHAIN FIND STRATEGIES
Home-improvement chain Lowe's is back to levels last seen in more than five years, and investors are playing it safe.

optionMONSTER's Depth Charge monitoring program detected the purchase of 6,300 November 32 puts against open interest of 2,309 contracts. Premiums rose from $0.58 to $0.65 as the trades crossed, which shows the strong buying pattern, with the largest block pricing for $0.62.

Those puts lock in the price where the home-improvement stock can be sold, so they will appreciate in value if LOW falls. The investor probably owns shares in the company and wants to protect his or her gains against a pullback, without exiting the position. (See our Education section for other risk-management strategies.)

LOW is down 0.34 percent to $32.68 in afternoon trading but is up 28 percent in the last three months. The stock has now returned to same levels where it peaked in mid-2007 as the housing market started to slide before the subprime crash. Now that LOW has returned to these levels, some chart watchers may expect a pause or pullback, which would explain today's cautious stance.

The next earnings release is scheduled for Nov. 19.

Total option volume is slightly above average so far today, with puts accounting for the bulk of the activity.
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As discussed last week, when using the Stock Replacement Strategy to replace a stock position to trade direction, we want to use an option that has very similar characteristics to the stock. We talked about using the deep in-the-money, 80 to 85 delta option that is similar in the Greeks and has relatively little extrinsic value which tends to work against us in stock directional trading.

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